Tesco pulls back in China with Vanguard deal

Tesco will slash its China exposure by taking just 20 per cent of a venture with a state-run company, a deal that underlines the travails foreign retailers have had in the Chinese market and allows it to concentrate on turning around its domestic business.

Lured by the prospect of a rapidly growing middle class in the world’s second-biggest economy, many foreign firms have waded into China’s retail market only to find they lack local expertise, particularly in building strong relationships with suppliers.

Germany’s Metro said in January it was pulling out of the consumer electronics business in China while Home Depot said last year that it would close all seven of its big-box home improvement stores. Wal-Mart Stores has also found it challenging to maintain growth in China, losing ground to Sun Art Retail Group.

“Tesco has been struggling in China and has been losing money. Similar to Carrefour, they had issues in their home market which they had to resolve,” said one Hong Kong-based M&A banker.

“This may look win-win, but in reality, Tesco is saying ‘I can’t figure out China’,” he said.

Under the deal, state-run China Resources Enterprise, the country’s second-biggest operator of hypermarkets including the Vanguard chain, will take 80 per cent of the venture. Its Vanguard unit operates 2,986 stores, mainly hypermarkets or supermarkets, across China and Hong Kong, while Tesco, the world’s third-biggest retailer, has 131 outlets.